The Walt Disney Company (DIS) - March/April 2020 Find Me Value Investment Research LLC
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The Walt Disney Company (DIS)
March/April 2020
Find Me Value Investment Research LLC
Findmevalue.net
Twitter: @Find_Me_Value
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Do your own research. Trust but verify.
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Findmevalue.net
The Concerns
Coronavirus Impact
• “Putting it all together, despite the fall in Disney’s stock price to date, we think the
combination of COVID-19 impacts and an ensuing recession will cause unprecedented pain
here.” – MoffettNathanson
• Disney’s overall business is put at major risk
• Generates substantial cash flow from ESPN, which is based on affiliate fees and advertising. Cord cutting
may accelerate, and there are currently no sports being played.
• All of the theme parks are closed, until “further notice”, at an est. $30m/ month in costs globally
• Movie theaters are closed, film studios pushing back release dates by 6-12 months, halting production
on new films and series
• Theme parks closed March 15, 2020 in US – DIS will continue paying employees until mid-
April
• Disney has 77k employees at WDW Orlando, 31k at Disneyland, and 17k in Paris
• Effective April 5th, all VPs will have their salaries reduced by 20%, SVPs 25%, EVPs 30%,
Bob Iger forgoing 100%, and CEO Bob Chapek 50%
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Media Networks
• Apparently, ESPN executives are panicking trying to figure out what to do given sports
games have been postponed or cancelled
• Long cancellations could be the final straw for cutting the cord, if live sports was such a large reason for keeping the
expensive pay TV bundle
• ESPN owns more sports rights than any media entity
• ESPN makes about $11bn annually from ESPN and sister networks, charging around $9/month for all ESPN networks in
affiliate fees
• Also – earns about $2.75bn in advertising
• If the remainder of the NBA season is canceled, ESPN will lose about $481m in ad revenue (about $306m post tax, to
DIS)
• Canceled events:
• March Madness – CBS/ Turner own the rights (not ESPN or DIS)
• The Masters (Golf) – CBS
• ESPN holds some large contracts with NFL, but that doesn’t begin until Fall 2020 (Monday Night Football)
• Olympics moved to 2021 – Comcast / NBC
• MLB postponed – season is still in Spring Training, ESPN has rights
• NBA Season – ESPN and Turner Sports have contracts
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Theme Parks
• Disneyland – closing March 14th through TBA, as will the hotels
• Walt Disney World – closing March 15th - TBA
• Disney Cruise Line – suspending all departures from March 13th – TBA
• Shanghai Disneyland – closed on January 25, began reopening limited to some shops, dining, and
experiences as long as go through health screening, show a Health QR code
• Tokyo Disneyland – late February, opening postponed from April 15 to mid-May 2020 or beyond
• Disneyland Paris – closed March 15th – closed indefinitely
• DIS already said Shanghai and Hong Kong are costing them about $130m/month to stay closed
• Moffett Nathanson (03/27/2020):
• Anticipates closure at theme parks will stretch beyond March, at least into mid-April
• A one month shut down at DIS 6 theme parks could result in a $1.4bn loss of revenue
• Estimates $3.4bn loss in revenue in US theme parks due to Coronavirus + recession ($2bn impact on revenues)
• Estimates the 6 international theme park closures will result in $900m in lost revenue, total $4.3bn
• JPM estimates a $1.5bn hit if DIS doesn’t furlough employees, a $500m cost savings if they do
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Film Studio
• Movie releases are being pushed back
• Fast & Furious 9 – from May 2020 to April 2021 (11 months)
• James Bond “No Time to Die” – from April 2020 to November
2020 (7 months)
• Mulan (Disney) – TBA
• Black Widow (Disney) - TBA
• Less people are going to movies, theaters likely to close
temporarily
• Pixar’s Onward likely impacted, despite strong ratings and
reviews (update: DIS putting Onward on D+ April 3rd)
• Production of new movies halted
• The Little Mermaid
• Home Alone
• Peter Pan & Wendy
• Others….
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Film Studio (updated)
• DIS made some substantial
changes to their film line-up
(as of 4/3/2020):
• Moved Mulan back 4 months
(this is surprising, seems too
soon)
• Eternals – now 2021
• Dr. Strange – end 2021
• Thor: Love & Thunder – 2022
• Removed a Marvel title that
was to be released in 2022
• Indiana Jones - moved back a
year, to 2022
• Artemis Fowl will go direct
to Disney+
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Disney+
• Released Frozen 2 during spring break week, much
Daily US Disney+ sing-ups
earlier than expected (originally June 26, 2020)
• Releasing “Onward” on April 3rd, despite being a new
release in theaters just ~ 6 weeks ago
• Saw very strong demand from March 24th Western
Europe launch
• Other notes:
• Comcast said there is a 38% increase from March 1st in streaming and web
video consumption
• Given this fact + kids are off from school and likely will miss the remainder of
the school year, I imagine Disney+ is a must have for most family HHs
• From March 16th to March 23rd, Disney saw a 212% increase in US sign ups
(chart right)
• Saw 3.1x the volume compared to weekend volume, which was 2.6x daily
average for 2020
Find Me Value Investment Research
Findmevalue.netCoronavirus Impact on DIS: Bond Offering
• DIS went to the bond market twice so far
for additional capital:
• 3/20/2020 for $6.0bn
• 3/26/2020 for C$1.3bn at 3.057% 7-year
bonds
• DIS is paying WDW / DL cast members
and employees until April 19th as of now
• Estimate that Disney theme parks
(globally) are losing about $50m per day,
as they have no attendance but continue
paying employees
Find Me Value Investment Research
Findmevalue.netOverall Concerns with DIS
• Cable Networks = 59% of FCFF
• Advertising trends towards digital, is cyclical
• Long term sports contracts set, but revenue from affiliate fees (50% of revenues) not sustainable
• ESPN is most exposed to cord-cutting, as they earn a large portion of revenues from charging distributors
based on Pay TV ecosystem subscribers, which have been declining last 5 years and may accelerate
• Long term contracts with sports leagues travels the value proposition of having sports
rights to sports leagues, not DIS shareholders
• Theme Parks
• Raising admission ticket prices 5%+ per year unsustainable (admissions = 30% revenues from Parks,
Products, Experiences), especially during weak economy
• Capital intensive (~20% capital intensity)
• Key man risk with Kevin Feige (has produced or co-produced all Marvel movies thus far)
Find Me Value Investment Research
Findmevalue.netOverall Concerns with DIS
• DIS assets - cable networks / ESPN, film (Marvel, Pixar, Disney), and theme parks – all have
“peaked”
• Cord cutting impacting ESPN, leagues demanding larger contracts knowing the importance of live sports to the
overall bundle and advertising, yet ESPN subs declining, and ESPN is the largest monthly fee for distributors to
carry
• Marvel generated over $22bn globally at box office, but almost all of those characters are done, up and coming
characters not as strong or well known
• Theme park admission prices gouging people, eventually will have an impact in weaker economic times, or if it
becomes unaffordable for the average visitor
• Live sports rights will go down in value over time with rise of “e-sports”
• Disney+ / HULU / ESPN+ economics will not make up for the deterioration in the cable networks
and broadcast business with cord-cutting
• CEO Bob Chapek has a spotty reputation – such as going way over budget in Shanghai, laying off
workers in domestic parks due to overspending, Toy Story Land cut corners due to Shanghai budget
issues, “normal” workers / cast members feeling unappreciated
• Leverage due to the FOX transaction (~ $57bn in gross debt)
• Film business is in a slow terminal decline, forced to raise prices to offset less volume growth
(similar to Pay TV ecosystem)
Find Me Value Investment Research
Findmevalue.netConcerns & Discussions
Concerns: Slide Page
Coronavirus could bankrupt DIS (Disney) 14
Coronavirus impact on EPSN / no sports
could accelerate cord-cutting 43+
Coronavirus fears would change
consumer behavior around attending
largely gathered locations like theme 15
parks
Coronavirus impact on ESPN could hurt Not enough info. on
relationships / affiliate fee terms with these contracts
distributors
Find Me Value Investment Research
Findmevalue.netConcerns & Discussions
Concerns: Slide Page
Cord-Cutting Will Destroy the Pay TV
66
Bundle, ESPN is most exposed
Sports Rights continue to rise
astronomically + long-term deals + ESPN 48+
sub losses = potential major losses
CEO Bob Chapek ≠ Bob Iger / Abrupt 181
transition was oddly timed
Unknown Economics of Disney+, Hulu, 171
ESPN+
Find Me Value Investment Research
Findmevalue.netConcerns & Discussions
Concerns: Slide Page
Box Office for Disney has “peaked” 118
Theme Parks won’t do well in a recession;
sky high one day park passes an issue for 139
the “average potential visitor”
TBD; 21CF film has
Botched 21CF Acquisition Integration underperformed thus
far, but still TBD
Find Me Value Investment Research
Findmevalue.netConcern: Coronavirus impact could BK DIS
Concern: Moody’s note 3/19/2020
Coronavirus could bankrupt DIS (Disney)
• As of E 2019, DIS had $6.8bn in cash
• They also have a revolver capacity of $12.25bn ($0 balance)
• Only $2.4bn in bond maturities in fiscal 2020
• Moody’s believes things will begin to open at the end of Q2 2020
• 80% of DIS capex is theme parks, pretty much all of it can be
deferred, delayed, postponed (~ $4bn)
• Film production costs on hold
• Operating costs at theme parks, Disney retail stores, cruise lines on
hold
• Less/none food & beverage purchases at theme parks, cruises
• DIS will still pay, as of now, for employees. SG&A was $11.5bn in
fiscal
• Temporary mitigation with revenues for Disney+ and Hulu growing
slightly quicker than anticipated, due to large increases in streaming
viewership during the “quarantine” period
• Theme parks have some working capital, as visitors pay in advance.
Season passes will be extended, not refunded. Unexpired tickets
while closed will be extended through Dec. 15, 2020, not refunded.
Find Me Value Investment Research
Findmevalue.netConcern: Coronavirus Impact Visitors Long Term
Concern:
Coronavirus fears would change consumer behavior around
attending largely gathered locations like theme parks
• Think terrorism concerns would provoke more fears (due to large
crowds):
• Attendance fell 40% at US DIS parks in first weeks following 9/11
• 30% decline a year later from international visitors
• 6% decline a year later in US parks visitors (all due to int’l)
• Revenue in Q4 2001 (-17%) at theme parks
• Unless there are spikes in deaths of younger adults, and especially
children, coinciding with a lack of “nothing can be done if we get the
virus”, unlikely this will impact consumer behavior long-term
• Think people recognize this as a one-off crazy situation that shouldn’t
impact normal living behaviors once things “return to normal”
My belief: no impact on US theme park visitor trends due to
fears, short term impact on cruise lines (Concern: Contractual Programming Obligations
• DIS has ~ $50bn in programming obligations
• $43.9 bn related to sports programming rights – college football, NBA, NFL, UFC, MLB, Cricket, US Open
Tennis, Boxing, PGA Championship and various soccer rights
• $8.9bn is sports programming commitments
• Other obligations of $13bn
• 3 new cruise ships
• Employment agreements, obligations to actors, personalities, producers
Find Me Value Investment Research
Findmevalue.netOverview
“Businesses That Can Thrive, but Withstand Uncertainty”
High Quality
Only Universal (Comcast)truly competes with theme parks, NFLX with
Limited Competition streaming, no competition in theatrical release, and ESPN has more sports
Pricing Power rights than anyone else
ESPN = dominant for sports; Disneyland / Disney World = bucket list item for
Brand Affinity / Superiority
most parents; Marvel / Pixar / Lucasfilm global powerhouses
Film content drives more merchandise sales, attendance and investment at
Network Effects / Ecosystem theme parks, virtuous marketing for future film releases, and helps brand
association with Disney+
Regulatory Getting permits for theme parks takes time
Barriers to Entry Theme parks / Cruise spends about $4bn on capex, and a new park takes about
Capital Intensive + Time
3-4 years to build
In order to drive high ROIC and pricing power, the strongest theme park brands
Intellectual Property are those associated with incredible IP - only Universal and Disney offer this
globally. This IP enhances excitement for future film releases.
Higher margins than comps, more pricing power across (Disney+, ESPN, theme parks, cruise ships, distribution agreement with theater chains) leading
to high free cash flow
Find Me Value Investment Research
Findmevalue.net“A Good but not Great Business”
Business Quality "Question Marks"
Item Segment Notes
Theme parks have a ~30% EBIT margin, but they maintain this through continual price increases of
Theme Parks admission, food, and merchandise. Without the ability to pass through pricing, DIS theme parks margin
will stumble.
ESPN signs long term (5-15 year+) sports rights contracts, which are often 30-50%+ higher than the
Cost Structure ESPN previous one. The cost structure depends on subscriber and pricing growth, both of which are under-
pressure over the last few years due to Pay TV secular headwinds.
Both are expected to spend ~$3bn - $4bn over the next few years, which they are able to due to their
Hulu / Disney+ other businesses cash flow generation. In a recession (or pandemic), the other businesses suffer due to
their cyclicality, which may hurt spending/ marketing on the DTC businesses.
Average ~ 20% of revenues over the last few years, largely due to expansions, new projects, and upgrades.
Capital Intensive Theme Parks
Far more than the ~11-13% comps spend on normal capex. CapEx nearly ~2x more than Depreciation.
Pay TV subs in declines, puts immense pressure on the networks with long-term fixed sports rights
ESPN
contracts.
Industry Headwinds
Pay-TV, in the traditional sense, is in secular decline. Media networks are ~ 50% of FCFF. Furthermore, TV
Media Networks
advertising is no longer a growth business, may seem a slow decline due to less "viewership" going forward
ESPN / ABC / Hulu depends heavily on advertising revenues, which drop off during recessions, as
Advertising
companies cut back of ad spending.
Cyclical DIS theme parks are the most expensive in the world, at ~ $125/day for a one day ticket to WDW / DL in
Theme Parks the US. Given that attendance is often done in multiples (families), the ability to fork over $2k - $4k for a
few days is not as affordable for many families during a recession.
Find Me Value Investment Research
Findmevalue.netDisney: Owning Some of the World’s Greatest Franchises
List of Highest Grossing Media Franchises Ever
# Franchise Inception Total Revenue $ Original Media Owner
1 Pokemon 1996 $ 95 Video Game Nintendo / Pokemon
2 Hello Kitty 1974 $ 86 Cartoon Character Sanrio
3 Winnie The Pooh 1924 $ 76 Book Disney
4 Mickey Mouse & Friends 1928 $ 74 Animated Character Disney
5 Star Wars 1977 $ 70 Film Lucasfilm / Disney
6 Anpanman 1973 $ 60 Manga Froebel-kan
7 Disney Princess 2000 $ 47 Animated Series Disney
8 Jump Comics 1968 $ 40 Manga Shueisha
9 Super Mario 1981 $ 38 Video Game Nintendo / Pokemon
10 Marvel MCU 2008 $ 35 Film Disney / Sony
11 Harry Potter 1997 $ 32 Books JK Rowling / AT&T
12 Transformers 1984 $ 30 Animated Series Takara Tomy / Hasbro
13 Spider-Man 1962 $ 29 Comic Book Disney / Sony
14 Batman 1939 $ 28 Comic Book DC / AT&T
15 Gundam 1979 $ 26 Anime Sunrise
Source: Wikipedia
Find Me Value Investment Research
Findmevalue.netThe Walt Disney Company (DIS)
Walt Disney (DIS)
Stock Price $ 95.00
S/O 1,817.00
Market Cap $ 172,615
Cash $ 6,833
Investments $ 3,312
ST Debt $ 10,018
LT Debt $ 38,057
New Debt $ 6,500
NC Interest $ 9,029
Other Liability $ -
Total Debt $ 63,604
Net Debt $ 53,459
Enterprise Value $ 226,074
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